The potential payoff — or downside — is crucial when deciding whether to take a risk.
Three quite different situations had me contemplating risk recently.
I probably think of risk differently to most. To me, whether a risk is worth taking depends on the potential payoff, the potential downside, and how much I understand the nature of the risk.
The first ‘risky’ situation I contemplated was the plight of voters who voted early, before major election policies were announced or changed. This year’s campaign has encouraged early voting, effectively extending election day to election fortnight, supposedly to cater to our busy lifestyles.
But given the fluidity of election promises, an early vote was potentially a high risk move. You may have voted based on a set of expectations only to have those expectations dashed.
Was it a risk worth taking? This was your vote, your opportunity to influence the country’s direction and determine how the government’s budget will be allocated.
Sadly, a lot of voters probably consider the risk of an early vote as minimal. After all, politicians rarely deliver on all their election promises and anyway, if you don’t like the outcome, you get an opportunity to change it in three years’ time.
The second situation also involved a vote of sorts. The final of The Block television series was a damp squib as Auckland house buyers effectively voted not to be influenced by the drama of the show, but to bid conservatively, reflecting their view of the Auckland housing market.
Social media erupted over the fairness and authenticity of the auction outcome.
But all the contestants will have understood the risks they were taking in participating in the show. They obviously thought it was worth it to give up their jobs and families for 12 weeks to renovate a property, in the hope that buyers on a single night would pay a high enough price for them to win the prize.
Was it a risk worth taking? For Ling and Zing, the contestants who left with $1,000 to show for 12 weeks work, arguably not.
But they had as much chance as the other three couples to make more than $100,000 in just three months. They weren’t horrible odds.
A commentator’s poke at KiwiSaver providers for charging ‘exorbitant’ fees, and his criticism of the Financial Markets Authority (FMA) for not properly regulating the industry was another trigger to think about risk. The critic argued people choosing the wrong provider risked missing out on extra retirement dollars.
How risky is it for someone to choose a KiwiSaver provider that charges more than another?
The upside could be significant. If the after-fee returns achieved over decades of retirement saving are better than those of lower-cost providers, the risk could be well worth taking.
What about the downside? The reverse is also true; if a higher-cost provider lags the returns of others, your retirement nest egg will be smaller than it could otherwise have been.
But, the difference between this risk scenario and the previous two, is your ability to influence and change the outcome.
Ling and Zing couldn’t take their house off the market and auction it months later for a potentially higher price. Early voters can’t retrieve their voting papers and change their vote for a potentially different outcome.
But, if you don’t like the returns you’re getting for the fees you’re paying your KiwiSaver provider, you can take your money and give it to another provider anytime, and as often as you like.
In the scheme of things, this scenario doesn’t feel high risk to me.